Expatriate Taxes

If you are a U.S. citizen, resident alien living abroad, or if you have foreign income, it’s not uncommon for your tax situation to be maddeningly complicated. There are steps you can take to mitigate this problem however. Keep informed, do your research, and you’ll be able to take advantage of all of the deductions, credits and other tax saving opportunities available to you.

Critical Issues Facing Expatriates

1. Foreign Earned Income Exclusion

U.S. citizens and residents who live and work outside the U.S. may be eligible for the foreign earned income exclusion which will reduce taxable income. By way of this exclusion, citizens and residents may be able to exclude all or a portion of their foreign wage or self-employment income from their federal income tax liability.

In order to qualify for this exclusion, a person needs to work and reside outside of the U.S. and also meet either the Bona Fide Resident or Physical Presence tests.

2. Foreign Tax Credit

If you pay taxes to a foreign government on foreign income and are faced with a federal income tax liability to the U.S. on said income, you may be eligible for a foreign tax credit. You may also benefit from an itemized deduction depending on the details of your situation.

If you take a deduction, your foreign income taxes will be used to reduce your U.S. taxable income. If you take the tax credit, your foreign income will reduce your U.S. tax liability. Taking the tax credit will place you in a superior position (in most cases).

3. Foreign Bank Account Reporting

If you have a financial interest in — or significant authority over — a foreign financial account, such as:

a bank account

brokerage account

trust

mutual fund

money market account

or other type of account, and your interest exceeds certain thresholds (i.e. $10,000 at any time during the year), the Bank Secrecy Act may compel you to formally report your account annually to the IRS by filing a report of Foreign Bank and Financial Accounts (FBAR). To report the FBAR you will need to complete and send form TD F 90-22.1.

Form 8938 – Under FATCA, certain U.S. taxpayers holding financial assets — $50,000 on the final day of the tax year, or $75,000 at any time during the tax year — outside of the U.S. is required to report those financial assets to the IRS.

Higher threshold amounts apply to married couples filing jointly and for individuals who are living abroad. Generally, taxpayers report these assets using Form 8938 (downloadable above), Statement of Specified Foreign Financial Assets.

If you are neither a United States citizen or resident, but generate income in the United States, you may be required to file a U.S. income tax return.

Rental Income & Dividends/Interests from Assets in the United States

Individuals who are neither U.S. citizens or residents are liable for U.S. income tax only on the income which is generated by working with a U.S. trade or business entity. Rental income from U.S. real estate and recognized gains from the sale of U.S. real estate are subject to taxation by the United States. Also, as a general rule, dividends and interest payments from U.S. corporations are taxable by the U.S. government.

Located in the greater Seattle region, Huddleston Tax CPAs provides high-quality tax solutions both for U.S. expatriates overseas and for foreign nationals, including resident and non-resident aliens.